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Chapter 6.6

Outsource Selected Procurement and Materials Management Activities


Summary

In 1997, KPMG Peat Marwick delivered a report to the Texas Department of Transportation (TxDOT) that included recommendations to improve the management of materials, supplies, and equipment. TxDOT implemented some, but not all of the recommendations. TxDOT has conducted a successful pilot program to outsource auto parts procurement and inventory, but has not expanded the program statewide. TxDOT should expand this pilot program. Two other recommendations, herbicide rig manufacturing and custom fabrication of trailers and cabinets, should be reviewed by the Council on Competitive Government.


Background

The Texas State Comptroller’s Office uses the “Yellow Pages Test” as one of its strategies for achieving smaller, smarter government. The Yellow Pages Test states that government should do no job if there is a business in the Yellow Pages that can do the job better and at a lower cost.

TxDOT contracted with a major consulting firm, KPMG Peat Marwick, to look for ways to improve its management of supplies, materials, and equipment. In June 1997, TxDOT received the results of this study, which included procurement and materials management as major focus areas.[1] This effort is notable in that TxDOT initiated the project and its employees actively participated in each of the focus areas.

This report includes extensive analyses, recommendations, implementation plans and evaluation of outsourcing opportunities. Although some recommendations have been adopted by TxDOT, other recommendations have had limited or no implementation. Three of these recommendations, which are summarized in Exhibit 1, would allow TxDOT to realize significant savings.

Exhibit 1

KPMG Project Recommendation
Estimated Savings
TxDOT Actions Taken
Outsource the entire auto parts procurement and inventory function.[2]
$5,384,874in the first year and $3,563,288 in subsequent years. [3]
The Texas Centralized Auto Parts System (TCAPS) pilot program continues to operate solely in the San Antonio District. [4]
Outsource herbicide rig manufacturing.[5]
$227,766 annually[6]
TxDOT still manufactures these units at its Camp Hubbard facility.[7]
Outsource trailer production and custom fabricated carpentry at the Austin General Shops.[8]
$174,433 annually[9]
TxDOT still continues these activities at its Camp Hubbard facility.[10]


Texas Centralized Auto Parts System (TCAPS)

TxDOT equipment parts procurement practices and inventory levels varied widely among the four district facilities visited during the review, Austin, San Antonio, Bryan and Tyler. The San Antonio district is unique because it uses an onsite vendor to operate its equipment parts program. This program began in January 1996. It was modeled after the Contractor Operated Parts Store (COPARS) program used by the US Air Force for their vehicles. [11]

At the San Antonio district office, the TCAPS vendor has two employees providing an in-house parts operation within the facility. This program operates within a fraction of the space formerly used when TxDOT managed the parts operation, yet mechanics have fewer delays and increased availability, reducing equipment down time. Significant efficiencies are realized because TxDOT does not have to process individual purchase orders, having shifted that burden to the TCAPS vendor. TxDOT only has to process a single, biweekly invoice from the TCAPS vendor rather than numerous invoices from multiple vendors.

During fiscal 1999 the district would have processed 5,400 purchase orders without TCAPS. Based on TxDOT’s estimate of $70 to process a purchase order, the 5,400 purchase orders needed would have cost $378,000 to process.[12] In contrast, with TCAPS, the district processed 24 invoices during fiscal 1999, resulting in a savings of $376,320.[13] TCAPS represents a clear “best practices” approach to equipment parts acquisition by TxDOT.

The 1997 KPMG Peat Marwick report recommended expanding the TCAPS program, which was estimated to produce more than $5 million in savings in the first year and $3 million in savings in subsequent years.[14]


Herbicide Rigs

TxDOT manufactures herbicide rigs at its general shops in Austin. This process consists of mounting herbicide tanks, an auxiliary engine, low-speed cruise control, a TxDOT-designed and manufactured spray assembly, and cab-mounted switching controls to a purchased cab and chassis unit. TxDOT manufactures an average of 13 of the 500-gallon and 14 of the 1,500-gallon herbicide rigs annually.[15]

The 1997 KPMG Peat Marwick report included a detailed analysis of the cost efficiency of TxDOT’s herbicide rig manufacturing process. KPMG Peat Marwick also reviewed the practices of other states and Texas entities, and investigated the commercial availability of suitable products. The report recommended that TxDOT stop internal manufacturing in favor of contracting with outside vendors to install commercially-produced herbicide spray units on a TxDOT-provided chassis. The report estimated savings of $227,766, based on a total production of 14 500-gallon and 14 1,500-gallon units.[16] The report also cited the primary risk associated with outsourcing this function to be the loss of in-house expertise should market conditions change.[17]

Not examined in the 1997 KPMG Peat Marwick report was the potential of the Texas Department of Criminal Justice (TDCJ) producing herbicide rigs. The TDCJ Powledge Unit, located in Palestine, Texas, manufactures dump truck beds for TxDOT using extensive welding and fabrications skills and paints/refurbishes equipment for other state and county agencies. Onsite consultant observations of the Powledge Unit’s management, facilities, and finished products were impressive and reflected a sense of pride in the work performed.[18] The Comptroller of Public Accounts supported the market demand for these skills in its 1999 review of the state’s prison industry. This review indicated that TDCJ assigned 264 inmates to welding positions in 1998 while the Texas economy offered at least 1,470 jobs. The Comptroller’s review further reported that “companies that might otherwise reject hiring ex-inmates were offering top wages and even housing to trained welders upon release.” [19]

Reducing inmate recidivism is one goal of the Texas prison system and developing marketable skills for inmates is considered critical to meeting this goal.[20] The skills demonstrated at the Powledge Unit facility suggest the capability for TDCJ to produce herbicide rigs while providing high-demand skills for prison inmates.


Custom Fabrication

The Austin general shops that facility manufactures herbicide rigs also fabricates a variety of small trailers often mounted with a diesel fuel or water tank, cabinetry, civil engineering laboratory equipment, and small informational roadway signs.[21] Decisions of what items to produce are based on capacity and a favorable cost estimate of TxDOT production costs when compared to an external source.[22]

The 1997 KPMG Peat Marwick report analyzed the cost of selected fabricated items, compared production to other state transportation departments and local agencies, and investigated the commercial availability of suitable alternatives to Austin general shops facility-produced products. This report determined that the Austin general shops facility estimates failed to include facility costs. It also reported that no other state transportation departments contacted were producing products on the scale of TxDOT’s Camp Hubbard facility. Most state transportation departments concentrated instead on equipment and facilities maintenance.[23]

A simple search by the KPMG consultant of the Austin Yellow Pages verified the widespread availability of commercial sources for cabinetry and custom products. Commercial trailers were also determined to be widely available, but were not considered comparable to those produced by TxDOT’s Austin general shops facility. No alternate sources of civil engineering laboratory equipment were identified. However, the KPMG Peat Marwick report speculated that alternative testing specifications could be developed that support the use of commercially available laboratory equipment.[24]

The 1997 KPMG Peat Marwick report recommended that the TxDOT Austin shops facility completely cease trailer and cabinetry production.[25] Savings estimates for purchasing TDCJ-fabricated trailers totaled $132,382 annually.[26] Estimated annual savings on TDCJ-provided cabinetry production were not calculated; however, savings projections for private sector production of cabinetry totaled $26,840.[27] Rather than calculating full-time equivalent employee reductions resulting from outsourcing, the report noted that eight to nine workers were needed to perform the remaining fabrication duties.[28] While the KPMG Peat Marwick report did not indicate which specific TxDOT positions should be eliminated, current staff at the Austin shops facility include 22 workers: four in the machine shop, six in welding and sheet metal, two in the paint shop, four carpenters, and six auto mechanics. The auto mechanics also provide fleet maintenance. Other shop personnel perform various fleet-related work in addition to fabrication operations. [29]


Recommendations

A. The State Council on Competitive Government (CCG) should identify the districts in which to expand the Texas Centralized Auto Parts System (TCAPS) program.

CCG should expand the TCAPS program and, ideally, contract with a single vendor for all locations in order to receive the lowest prices and realize the greatest administrative efficiency. However, dividing the TCAPS program among several vendors may improve the pool of prospective bidders.

B. The State Council on Competitive Government should review TxDOT’s herbicide rig manufacturing, trailer fabrication, and cabinet construction operations to determine the most effective and efficient provider for these services.


Fiscal Impact

Expanding the TACPS program to all district shop operations and selecting the most effective and efficient provider to produce herbicide rigs, construct trailers and construct cabinets would reduce TxDOT’s costs. The KPMG Peat Marwick study estimated these savings at $5.8 million in the first year and almost $4 million in subsequent years. Since 1997, TxDOT has implemented several changes to its procurement system, such as increasing its outsourcing of auto repairs that result in lower stocks of auto parts, allowing it to realize some of the savings. However, additional savings would result from fully implementing the KPMG Peat Marwick recommendations. Under TxDOT’s current operations, implementing these recommendations is expected to save $4 million in the first year and $2.7 million in the subsequent years. The estimated savings below represent amounts to the State Highway Fund that could be directed to Texas Department of Transportation roadway construction and maintenance programs to bring the highway system into the 21st century.

Fiscal Year
Savings to the State Highway Fund Available to Redirect
2002
$4,000,000
2003
$2,700,000
2004
$2,700,000
2005
$2,700,000
2006
$2,700,000

Endnotes

[1] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment by KPMG Peat Marwick, Austin, Texas, June 25, 1997, pp. i-1 – i-17. (Consultant’s report.)

[2] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-14. (Consultant’s report.)
[3] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-16. (Consultant’s report.)
[4] Interview with John Bohuslav, director of maintenance, San Antonio District, Texas Department of Transportation, San Antonio, Texas, February 8, 2000.
[5] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 7-31. (Consultant’s report.)
[6] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 7-33. (Consultant’s report.)
[7] Interview with Gordon Gregg, chief, Support Services Section, Texas Departmentof Transportation, Austin, Texas, January 25, 2000.
[8] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-6. (Consultant’s report.)
[9] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, pp. 8-9, 8- 10. (Consultant’s report.)
[10] Interview with Gordon Gregg, chief, Support Services Section, Texas Department of Transportation, Austin, Texas, January 25, 2000.

[11] Marine Corps Logistics Base “COPARS program” (http://www.ala.usmc.mil/contracts/cop5sow.pdf). (Internet document.)

[12] E-mail communication from Glenn Hagler, equipment purchasing manager, Texas Department of Transportation, Austin, Texas, June 1, 2000; and 1999 TCAP Report, by Wilbert Moore, San Antonio district warehouse manager, Texas Department of Transportation, San Antonio, Texas, November 28, 1999.

[13] Telephone interview with Wilbert Moore, San Antonio District Warehouse Manager, Texas Department of Transportation, San Antonio, Texas, August 9, 2000. Texas Department of Transportation’s cost to process 5,400 purchase orders @ $70 an order = $378,000. Texas Department of Transportation’s cost of processing the TCAPS vendor’s 24 invoices: (24 invoices @ $70) = $1,680. The process saving for handling only 24 versus 5,400 transactions equals $378,000 less $1,680, or $376,320.

[14] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-16. (Consultant’s report.)

[15] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, June 25, 1997, p. 7-27. (Consultant’s report.) and Letter from Charles W. Heald, P.E., executive director, Texas Department of Transportation to Clint Winters, Research and Policy Development, Texas Comptroller of Public Accounts, August 28, 2000.

[16] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, pp. 7-27 –7-33 (Consultant’s report.)

[17] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 7-34, (Consultant’s report.)

[18] Interview with R.C. Cousins, division manager, Texas Department of Criminal Justice, Palestine, Texas, February 1, 2000.

[19] Comptroller of Public Accounts, Texas Prison Industry Performance Review - A Report to the 76th Legislature, Austin, Texas, February 1999, p. 10.

[20] Comptroller of Public Accounts, Texas Prison Industry Performance Review - A Report to the 76th Legislature, Austin, Texas, February 1999, p. 9.

[21] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-1. (Consultant’s report.)

[22] Interview with Gordon Gregg, chief, Support Services Section, Texas Department of Transportation, Austin, Texas, January 25, 2000.

[23] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-1-8-5.

[24] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-7.

[25] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, pp. 8-6

[26] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-10.

[27] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, p. 8-6.

[28] Texas Department of Transportation, Business Process Retooling - Fiscal Services/Supplies, Materials, and Equipment, by KPMG Peat Marwick, Austin, Texas, June 25, 1997, pp. 8-7 to 8-8.

[29] Interview with Gordon Gregg, chief, Support Services Section, Texas Department of Transportation, Austin, Texas, January 25, 2000.